David Cameron shifted the political gravity of his government firmly to the right in a substantial government reshuffle that left Nick Clegg weakened and raised the prospect of a series of fresh coalition disputes over crime, the environment and business-friendly policies.

In the only serious setback for Cameron and his closest ally George Osborne, Iain Duncan Smith insisted on staying at work and pensions secretary, so raising the prospect of a battle as the Treasury demands a second round of big welfare cuts next year to bring the deficit-reduction programme back under control.

Chris Grayling, the tough employment minister, has instead been handed the role and will use the portfolio to challenge European judicial interference in British government decisions.

A senior Tory minister said: "Overall this is a serious lurch to the right."

Downing Street itself billed the reshuffle, the only major recasting of government planned ahead of the 2015 election, as an attempt to promote ministers capable of delivering on policies already announced. In a symbol of the commitment to delivery, Cameron has appointed Locog chief executive, Paul Deighton, as Treasury minister based in the Lords to deliver infrastructure.

Although No 10 said the reshuffle did not mean any change in coalition policy, a string of appointments signalled otherwise. Cameron demoted Andrew Lansley, the health secretary, after the debacle over health reforms in the past year, but surprised many by asking Jeremy Hunt to take up the portfolio.

Hunt has been under relentless Labour attack over his role in News Corporation's attempted takeover of BSkyB, but is rated by Cameron for his ability to focus on a clear political message. His first task will be to resell and amend Lansley's legacy, aided by Grant Shapps, the smooth-talking new Conservative chairman.

The removal of Justine Greening as transport secretary, a fierce opponent of a third runway at Heathrow, and her replacement by the former chief whip Patrick McLoughlin also paves the way for a government shift on aviation expansion, probably though a cross-party commission on aviation policy.

In a blunt assessment even by Boris Johnson's standards, the London mayor denounced Greening's transfer to international development as madness. He issued a blistering statement praising Greening as "a first-rate transport secretary".

"Now it is clear that the government wants to ditch promises and send yet more planes over central London," he said.

Theresa Villiers, another London MP opposed to the third runway, has also been shipped out of the transport department to take charge of Northern Ireland, a promotion of a woman to cabinet in a reshuffle that overall did little to advance the cause of women in politics.

Grayling's appointment also signals a determination by Cameron to take a tougher line on sentencing, the Human Rights Act, legal aid and community punishment, a nexus of policy issues that has left Conservative backbenchers frustrated by what they regarded as Clarke's willingness to pander to Lib Dem opinion.

Axing Clarke from the post removes a running sore for the Sun, Telegraph and Mail, even if he remains as a minister without portfolio free to advise on economic policy. It is a move Osborne will view with mixed feelings. Clarke, who rejected an offer to become leader of the Commons, has ensured that he will sit on the key cabinet sub-committee on the economy and on the national security council.

In practice Clarke has been a deficit hawk, and Tory pro-growth policies will be promoted by Michael Fallon at business, Nicholas Boles at planning and Mark Prisk as housing. But Tory MPs said Osborne had failed to extend his grip over Whitehall in every area. The biggest setback was the refusal of Duncan Smith to relinquish the post of work and pensions secretary, where he has been involved in a series of battles over his welfare reforms.

The chancellor was keen to move Duncan Smith because he is fighting a public battle to resist Osborne's plans for a further £10bn in welfare cuts by 2016. Duncan Smith's success raises the prospect of a renewal of his alliance with Nick Clegg, who provided vital support over the funding of his welfare reforms. The deputy prime minister told the Guardian last week that he would only accept some of the extra welfare cuts in return for a wealth tax.

But Osborne will see some of his allies in key posts. Michael Fallon, a member of his circle, and Matt Hancock, his former chief of staff, move to the Department of Business, Innovation and Skills.

Downing Street avoided a major setback when Lady Warsi reluctantly accepted a demotion from Tory co-chair to be "senior minister of state" at the foreign office.

Warsi had planned to refuse the new job after being informed by the prime minister on Monday that she was being demoted. This would have raised questions about Cameron's focus on promoting members of Britain's minority ethnic communities. But in the end Warsi decided to remain on board, after Cameron told her she would remain a key member of the government.

Only three cabinet ministers were fired altogether from the government– Caroline Spelman, Cheryl Gillan, and Sir George Young. Cameron appointed four women from the class of 2010. Liz Truss, one of the most influential thinkers of the new intake, becomes an education minister. Helen Grant, who played a key role in negotiating changes to the legal aid bill to answer concerns among women's groups about domestic violence, becomes a justice minister. Anna Soubry and Esther McVey come in to the health and work and pensions departments respectively.

In a move designed to focus Liberal Democrat resources on election-winning domestic issues, Clegg appointed allies David Laws to education, Jeremy Browne to the Home Office and Norman Lamb to health. The Lib Dems vacated both the Foreign Office and the Ministry of Defence, a move that shocked Nick Harvey, the Liberal Democrat armed forces minister who had used his base to shape a distinctive policy on Trident.